Cargill Set to Buy Main Unit of Continental Grain, Its Chief Rival

By ALLEN R. MYERSON

Published: November 11, 1998

For Floyd Schultz, yesterday's news that Cargill Inc. had agreed to buy the grain operations of its chief rival, the Continental Grain Company, was about as welcome as another drop in his already low corn and soybean prices.

Right now, when he transports his grain by truck just four miles to Lockport, Ill., he can choose between Cargill and Continental grain terminals, sitting side by side along a canal leading to the Illinois River.

Once they combine, he said, the nearest competitor will be an Archer Daniels Midland terminal 30 miles and another 10 cents a bushel in shipping costs away. While Cargill could lower its prices and improve its margins, he said, ''We as farmers would be the ones who pay.''

Cargill and Continental Grain executives answer that, for farmers, the advantages of their combination in storage, processing, distribution and export far outweigh the minimal risks. ''What's important for farmers is to have the most efficiency,'' said Paul Fribourg, the chief executive of Continental Grain, who added that consumers could see some lower costs, too.

Cargill, the nation's largest private company, and Continental Grain, one of the largest, did not disclose their terms, though analysts estimated the price exceeded $300 million. Cargill, based in Minneapolis, handles about 20 percent of the nation's grain exports, and Continental Grain handles about 15 percent. But Cargill's crucial advantage is having mills and plants to process grains into meals, flours and oils, expanding its sales opportunities and improving its overall profit margins.

Continental Grain has been left as a middleman, buying, storing and selling grain on increasingly narrow spreads. Besides the payment from the sale, Continental Grain would also be able to free the huge amounts of capital tied up in its grain inventories. The company could then better support its other businesses, among them financial services and livestock, where it is the nation's leading cattle feeder, bringing 1.1 million head to market this year.

The company's Contifinancial arm, publicly traded but about 75 percent owned by the parent company, has been besieged by its own falling profits in such businesses as providing commercial and residential mortgages and home equity loans. Shares of Contifinancial rose $1.50 yesterday, to $8.6875, as analysts anticipated that the sale of the grain operations would improve Contifinancial's finances.

Mr. Fribourg described the decision to sell the grain operations, the foundation of a family business founded in Arlon, Belgium, in 1813, as wrenching. Having moved to Paris and then, during World War II, to New York, where it is based, Continental Grain in recent decades opened huge markets for American grain in the former Soviet Union and in China.

But two years of searching for a partner in the more profitable ends of the grain business, genetic crop engineering or processing, resulted in frustration.

The talks with Cargill instead got down to an outright purchase. Combining Continental Grain's 6 export terminals, 27 river terminals and 32 buying stations with its own terminals and mills will improve Cargill's flexibility and productivity, executives said. ''It will allow us to better serve producers in terms of how we buy grain, how we load and transport grain and how we sell grain,'' Frank L. Sims, president of Cargill's North American Grain division, said in an interview. Farmers will still have their cooperatives and many other corporate grain buyers, he added.

While a Federal Trade Commission spokesman did not have any comment yesterday, some farmers like Mr. Schultz, who is also chairman of business development for the National Corn Growers Association, did. Large crops and falling Asian demand have pushed corn prices down from about $5 a bushel two years ago to less than half that now.

Mike Yost, a Minnesota corn and soybean farmer and president of the American Soybean Association, predicted the deal would cost farmers another penny or two a bushel, or perhaps a dollar or two an acre.

Or at least $2,700 a year for him. ''We see constant consolidation of both our input suppliers -- for seed, fertilizer, pesticides and the people who purchase our production, he said. ''Obviously, the trend's not healthy for the American farmer.''